ESG Can No Longer Be Ignored in Australia

ESG considerations are no longer simply a "nice to have" when making a business strategy, business model and operational decisions. It is now critical for businesses to embrace and adopt sustainable, meaningful ESG business practices to ensure their long-term viability.

From May 2020 to May 2021, nearly USD 200 billion was invested into ESG labeled products, with the total global value of assets for ESG products now hitting more than USD two trillion. With buy-side investors and consumers worldwide prioritizing the environment, corporate ethical behavior, social responsibility and strong governance expectations (including from the suppliers of their goods and services), conducting business without proper consideration for ESG can translate into a financial or environmental cost, harmful social or reputational exposure for a company and financial harm to its bottom line and ultimately its shareholders.

Businesses are increasingly looking to external financial advisors to provide sound ESG advice that will not jeopardize their business practices, operations, employees, asset base, social standing in the communities they operate or overall reputations. In the past, it boiled down to simply whether or not a company was involved in old-world business methods and practices versus newer, more sustainable business models. However, now stakeholders at all levels of a business - whether end customers, suppliers, employees, management, shareholders, regulatory bodies or other external stakeholders - increasingly understand, and are focused on, the nuances of the multitude of issues encapsulated by environmental, social and governance strategies. 

Despite long-standing warnings about climate change from the scientific community, several factors accelerated the business demand for responsible business practices in Australia. There is undoubtedly greater awareness and understanding of climate change and the need for all businesses to act responsibly to this dilemma. The numerous severe weather events, such as bushfires and floods, brought the environment front and center in the psyche of all Australians. More broadly, there is growing awareness and understanding across consumers and businesses that businesses must take meaningful action to improve and conduct themselves in a socially responsible and sustainable manner to have a credible “social license” to operate on a long-term basis.

According to Gartner research, media mentions of ESG data, ratings or scores grew by 303 percent year over year in 2020. The growing awareness and focus will only increase into the future.

Globally, we have seen company stakeholders and activists demand more from corporates, resulting in a growing appetite for renewable energy. We have seen seismic shifts in rhetoric from global fossil fuel producers as they grapple with the global transition to clean energy.

Australia has also seen itself at odds with the international community regarding its approach to net-zero carbon timeframes. We have seen the federal government recently shift its rhetoric toward sustainability to appeal to voters ahead of the next election in the coming months, demonstrating that further work and better leadership are clearly needed in this area.

Key factors to consider when measuring responsible business practices

Businesses need to identify and intimately understand the various stakeholders, communities and environments in which they operate and adopt meaningful, sustainable, action-oriented ESG policies aligned with that understanding.

They should consider how their company's strategic goals align with the United Nations' Sustainable Development Goals, a collection of 17 interlinked global goals designed to be a "blueprint to achieve a better and more sustainable future for all." Of course, individual businesses will be at different progressive stages of maturity along that path. Therefore, consideration needs to be given to whether a company is moving toward demonstrating greater ESG responsibility or whether it has substantial inherent defects in its business model or operating practices that need to be addressed with substantive, meaningful action over time. Businesses will be measured by — and held accountable for — their actions (or perhaps lack thereof) and not by the “motherhood” statements and words crafted within their ESG policy manuals.

Businesses will also increasingly need to assess the products and services of their suppliers according to their stage of maturity in adopting sustainable, responsible ESG practices. From understanding how ESG business-practice changes can add significant value to a brand, to being able to operate sustainably long term, these markers will ultimately drive a business’s long-term success and viability.

A responsible company should demonstrate financial, operating and social responsibility by adopting sustainable practices that result in greater efficiencies and savings. They should also regularly compare their actual operational performance against crucial ESG targets, and report transparently to shareholders and other stakeholder groups. By doing so, they can ensure shareholder returns and management performance are intrinsically tied to ESG and shareholder value.

ESG’s effect on sectors

It’s stating the obvious, but all fossil fuel companies globally are under mounting pressure to responsibly adapt their business models. This includes responsible exiting of certain businesses or cessation of some business activities and/or a transition to clean energy. This has been evident through the number of high-profile, large-scale mergers and acquisitions (M&A) announced in Australia in recent months.

Likewise, manufacturers are under pressure to reduce their emissions and employ sustainable methods of production as well as fair working conditions. These improvements have a secondary effect on retailers to ensure their supply chain is transparent and operating in a socially responsible and sustainable manner.

The new era of ESG accountability heralds a unique opportunity for businesses with ESG challenges to make the requisite positive, sustainable and measurable change to their business models, business practices or industry sectors, thereby adding value for all stakeholders. It will increasingly involve ESG-related M&A transactions to ensure that businesses are “walking the walk” with meaningful action-oriented ESG conduct and initiatives and not just “talking the talk” with year-on-year empty ESG policy promises.

A good benchmark for a standard of measurement in ESG

It is critical that companies develop a measurable strategy and report against that, either as part of their annual report or as a separate standalone report. Some measurement benchmarks should include:

• Net promoter scores: How willing are customers to recommend the business to others?
• Gender and diversity targets
• Ethical employment and fair-trade practices
• Social responsibility targets, including community engagement, involvement and investment
• Financial reporting: responsible investment including measurable efficiencies through enhanced sustainability practices
• Sustainability performance, including transitioning toward net-zero at a corporate level
• Supply-chain transparency, sustainability and accountability
• Shareholder culture, including giving them a say on senior directors’ compensation and the business activities and social conduct of organizations.

Conclusion

The UN Climate Change Conference in Glasgow (COP26) taking place this month will focus on meaningful action and proper social behaviors from businesses instead of the standard rhetoric that for years has achieved very little. Businesses will be held accountable for their actions or lack thereof and be judged harshly where they fall short of community and societal expectations.